Archive for January, 2014

  • Beating Lowered Expectations
    , January 24th, 2014 at 1:49 pm

    In today’s newsletter, I wrote:

    We’re still fairly early in the Q4 earnings season. Some 109 of the 500 stocks in the S&P 500 have reported so far. Of those, 74% have beaten their earnings estimates, while 67% have beaten their sales estimates. Unfortunately, those numbers sound better than they are when we consider that going into earnings, many companies had rolled back expectations. Essentially, they lowered the bar to the ground and now expect applause from investors for stepping over it. Well, that hasn’t been happening.

    Now I have a graph to back up that point. This is the estimate over time of earnings for Q4 2013 (courtesy of S&P).

    image1381

    So yes, we’re beating expectations.

  • The S&P 500 Breaks Its 50-DMA
    , January 24th, 2014 at 10:52 am

    For the first time in three months, the S&P 500 has dropped below its 50-day moving average.

    big01242014a

  • CWS Market Review – January 24, 2014
    , January 24th, 2014 at 9:21 am

    “Successful investing is anticipating the anticipations of others.” – JM Keynes

    The stock market has been getting bumped around lately, and it hasn’t had much direction at all. Since December 23rd, the S&P 500 has closed every day but one between 1,826 and 1,849. That’s a fairly narrow range, although we are starting to see some behind-the-scenes rotations. For example, healthcare stocks are outperforming as consumer discretionary issues are lagging. The bond market has quietly improved, and the 10-year yield just hit a six-week low.

    big01242014

    Of course, the major focus this week has been earnings, earnings and more earnings. The theme so far is that not even good earnings are enough. Investors want to see big earnings beats plus higher guidance. If you don’t have both, you’re in trouble.

    We’re still fairly early in the Q4 earnings season. Some 109 of the 500 stocks in the S&P 500 have reported so far. Of those, 74% have beaten their earnings estimates, while 67% have beaten their sales estimates. Unfortunately, those numbers sound better than they are when we consider that going into earnings, many companies had rolled back expectations. Essentially, they lowered the bar to the ground and now expect applause from investors for stepping over it. Well, that hasn’t been happening.

    Fortunately, our Buy List stocks have reported very good earnings results so far. Again, it’s early, but all six stocks have beaten expectations. A few beat them by a lot. However, the stocks haven’t been richly rewarded by the market. It’s not just our stocks; no one’s getting any earnings love, and this really shows the market’s ornery temperament.

    Make no mistake: I still like the environment for stocks, but we have to come to terms with the reality that the market’s easy gains have already been made. This year won’t be as easy and stress-free as last year was. We’ll still see gains, but we need to be patient and have some humility.

    In this week’s CWS Market Review, I’ll run through our Buy List earnings reports. We had especially strong results from CA Technologies and Microsoft. The report from IBM, however, was rather weak, though I wasn’t expecting much.

    Later on, I’ll highlight our earnings reports for the coming week. Also, our friends at the Federal Reserve meet on Tuesday and Wednesday. It will be Mr. Bernanke’s swan song, and I expect to see another taper announcement. But first, let’s look at why everyone hates IBM (but me).

    IBM Beats Earnings but Falls

    On Tuesday, International Business Machines ($IBM) reported Q4 earnings of $6.13 per share. That was 14 cents more than Wall Street’s consensus. That’s the good news. The bad news is that much of that earnings beat was driven by cost-cutting. IBM’s top line numbers were pretty weak. Quarterly revenues fell 5.5% to $27.7 billion. That was $600 million below forecast, and it was the seventh-straight quarter of falling sales.

    We know that much of the tech world is shifting to cloud-based networks, but Big Blue isn’t exactly sitting still. The company is aggressively moving toward cloud services, and they’re ditching their lower-margin businesses. They just sold their server business to Lenovo for $2.3 billion. The company also realizes the situation it’s in; the entire senior team has foregone bonuses. On the positive end, I was impressed to hear IBM say that it sees earnings for 2014 of at least $18 per share. They also reiterated their earnings target of $20 per share for 2015.

    Simply put, IBM isn’t popular on Wall Street at the moment. The stock got clipped by more than 3% on Wednesday, the day after the earnings report came out. I’m not saying that IBM doesn’t face a difficult environment. It does. Its systems and tech revenue fell 26% last quarter. But IBM has transformed itself many times in its history. Remember that their cloud revenue rose by 69% in Q4 to $4.4 billion.

    I think IBM is in a position similar to where Microsoft was one year ago. Bears have been having a field day beating them up, but the stock is cheap now. It’s going for about 10 times earnings, which is far less than the rest of the market. My take: IBM will require some patience, but it’s a solid stock. I rate IBM a buy up to $195 per share.

    CA Technologies Is a Buy up to $36 per Share

    Also on Tuesday, CA Technologies ($CA) reported earnings of 84 cents per share, which easily beat Wall Street’s forecast of 71 cents per share. Last week, I said the Street’s consensus was “a wee bit too low.” Shows you what I know! Interestingly, this was the third time in the last four quarters that CA has beaten earnings by 13 cents per share.

    CA also guided Wall Street higher for the rest of the year. The December quarter is the third quarter of its fiscal year. So for 2014, CA now sees earnings ranging between $3.05 and $3.12 per share, compared with Wall Street’s estimate of $3.02 per share. The company also sees full-year revenues ranging between $4.52 and $4.57 billion, versus the consensus of $4.50 billion. This is what we like to see: beat and raise.

    CEO Mike Gregoire said, “Based on our results so far this year, we expect our fiscal year 2015 revenue growth rate and non-GAAP operating margin to be similar to fiscal year 2014.” That sounds good to me. So what did the market do with this good news? On Wednesday, shares of CA rallied by…four cents! Then on Thursday, they dropped by 65 cents. No, it doesn’t make any sense, but you can never argue with traders. Instead, we look at the facts. Going by Thursday’s closing price, CA’s dividend yields 3%. This week, I’m raising our Buy Below on CA to $36 per share. This is one of the good ones.

    Both Stryker and eBay Beat by a Penny per Share

    On Wednesday, both Stryker and eBay reported earnings that beat expectations by one penny per share. Let’s break down the results.

    For Q4, Stryker ($SYK) earned $1.23 per share, compared with Wall Street’s consensus of $1.22 per share. Honestly, I wasn’t too concerned with Stryker’s earnings report. They usually come very close to expectations. But I wanted to hear what the orthopedic outfit had to say about 2014.

    For this year, Stryker said they see organic revenue growth of 4.5% to 6%, and earnings ranging between $4.75 and $4.90 per share. That’s a very good number, and it’s well above where the Street was at $4.63 per share. For all of 2013, Stryker earned $4.23 per share.

    So with all this good news, what did the stock do on Thursday? It dropped 1%. I don’t get this one either. Stryker remains an excellent buy. I’m raising our Buy Below on Stryker to $81 per share.

    eBay ($EBAY), one of our new stocks this year, turned out to be the most newsworthy company this week. For Q4, the online-auction house reported earnings of 81 cents per share, one penny more than consensus. The company also authorized another $5 billion for its share-buyback program.

    But the big news came when multi-gazillionaire Carl Ichan said that he wanted to see eBay spin off its PayPal business. Icahn said that he’s going to nominate two of his people for the eBay board. Spinning off PayPal isn’t a new idea, but this is the first time someone so prominent has endorsed it. The board doesn’t like the idea, and they told Icahn so. But the market seems favorable for a spin off. On Wednesday afternoon, shares of eBay were trading up 8% in the after-hours market. On Thursday, however, eBay rallied for a 1% gain.

    Frankly, I doubt we’ll see a PayPal spin-off. It’s too integrated into eBay’s business. But I like seeing Carl Icahn advocate on behalf of shareholders. He didn’t get to where he is by being a shrinking violet. eBay had a solid quarter, and it continues to be a very good buy up to $58 per share.

    A Tough Quarter at McDonald’s, but Give Them Time

    On Thursday morning, McDonald’s ($MCD) reported Q4 earnings of $1.40 per share. That made the company our third earnings report in a row that beat estimates by one penny per share. Sales at the hamburger giant rose by 2% to $7.09 billion. But the details were pretty ugly. Comparable-store sales dropped by 0.1%, and in the U.S., comparable-store sales fell by 1.4%. Ouch.

    McDonald’s faces a number of challenges. The new CEO, Donald Thompson, hasn’t been as effective as I would have hoped. They’ve played around with the menu, but nothing has really taken off. The menu has probably grown too complicated and could use some paring down.

    The situation at McDonald’s is somewhat similar to that at IBM. The current environment is rough, but the stock is going for a good value. Ultimately, I think the problems are very fixable, but it will take a little time and effort. McDonald’s made about the same profit as one year ago, but thanks to share buybacks, there are fewer shares outstanding, so EPS rose by two cents. The dividend currently yields us 3.4%, which is a nice buffer for us. MCD is a buy up to $102 per share.

    Impressive Earnings Beat from Microsoft

    After the bell on Thursday, Microsoft ($MSFT) had a very strong earnings report. It turns out that Xbox had a great holiday season. The software giant had a net income of $6.56 billion, or 78 cents per share. That was a full dime more than Wall Street’s forecast. At the top line, revenue rose 14% to $24.52 billion. The Street had been expecting sales of $23.68 billion. The best news is that Surface revenue more than doubled to $893 million.

    While Xbox continues to be a great profit center for Microsoft, the Surface is still small potatoes. One big piece of missing news is that Microsoft still hasn’t yet announced who its next CEO will be. Ballmer is out soon. If you recall, there was some speculation that Ford’s Alan Mulally would jump ship and take over at Microsoft. Fortunately, that won’t happen.

    Microsoft jumped up more than 3% in Thursday’s after-hours market, but we’ll have to see how it trades from here. Microsoft was a great buy for us last year when it was under $27 per share. MSFT isn’t a screaming buy like it was a few months ago, but it’s still a good value. We also had a very nice dividend increase recently. Microsoft is a good buy up to $40 per share.

    Upcoming Buy List Earnings

    Still more earnings come in next week. Ford is due to report on Tuesday, January 28. Qualcomm follows on Wednesday, January 29, and CR Bard on Thursday, January 30. These dates may change, so please check our website for the latest. Also, Moog ($MOG-A) is due to report later today.

    I’m most looking forward to Ford’s ($F) earnings report. The automaker recently threw a damper on expectations for 2014. The short version of the story is that North America is doing well, but Europe is not. Ford has made it clear they’re playing the long game, so we probably won’t see a turnaround in Europe until 2015 or 2016. Wall Street currently expects Q4 earnings of 29 cents per share, which is down two cents from a year ago. That would be disappointing, but Ford is clearly moving in the right direction. The 25% dividend boost was a great vote of confidence.

    Qualcomm ($QCOM), another new stock on our Buy List, will be an interesting earnings report to see. The last report was a dud, and the stock’s subdued performance last year led me to add it to this year’s Buy List. The sentiment is beginning to shift here. If Qualcomm beats and offers impressive guidance, the shares could break out.

    Three months ago, CR Bard ($BCR) told us to expect Q4 earnings to range between $1.34 and $1.39 per share. That would put full-year 2013 earnings between $5.70 and $5.75 per share. They should hit that range without much difficulty. Bard is a buy up to $142 per share.

    That’s all for now. Next week will be the final trading week for January. The Federal Reserve meets on Tuesday and Wednesday. This will be Ben Bernanke’s final meeting as Fed chair. I expect to see another round of tapering. We have a few more Buy List earnings reports coming our way. On Thursday, we’ll also get our first look at Q4 GDP. The last three GDP reports have all seen increased growth rates, meaning economic acceleration. Let’s see if that continues. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

    – Eddy

  • Morning News: January 24, 2014
    , January 24th, 2014 at 7:13 am

    EM Currency Rout As Risk Appetite Wanes

    ECB Says to Cease 3-Month Dollar Operations as of April 2014

    Japan Government Forecasts Show Abe Missing Budget-Balance Promise

    Sochi’s Hotel Scarcity Deters U.S. Fans Considering Late Trips

    Billionaire Braves Bloated Self-Importance for Davos Chat

    Microsoft Posts Record Sales as Ballmer Prepares to Exit

    Speeding Up G.M.’s Comeback

    Icahn Says He Is Prepared for eBay Proxy Fight

    Samsung Electronics Pledges Higher Dividend After Record Payout

    VW Labor Rep Blasts Car Maker’s U.S. Strategy

    Can Jamie Dimon’s Pay Spark Political Populism?

    Senator Is Lobbying for Inquiry on Herbalife

    Key Witness Says Cohen of SAC Was F.B.I. Target

    Credit Writedowns: Argentina – From Bad to Worse

    Jeff Carter: Does the Economy Need Risk?

    Be sure to follow me on Twitter.

  • 25 Years of Stocks Vs. Bonds
    , January 23rd, 2014 at 3:45 pm

    When we ask the question, “Are stocks cheap?,” we have to consider the important qualifier: compared with what?

    Understand that every asset is in competition with every other asset for investors’ money. It’s like one giant cage match of relative value. There’s no absolute standard of value for any asset class at any time. The question is always, “Compared with what?”

    This is why the stock and bond markets have such a problematic relationship. Frenemies, if you will. Every so often I like to look at how the stock market is doing — not in terms of dollars, but in terms of the bond market.

    Below is a chart of the total return of the Wilshire 5000 (including dividends) divided by an index of AAA bonds.

    fredgraph01232014

    Over the long haul, I would expect stocks to out-perform bonds, but not by much. The chart above shows that it’s a very rocky and highly volatile relationship.

    Stocks have done well recently, but that’s making up a lot of lost ground. over the last 15 years, stocks have done just about as well as bonds have.

    I wouldn’t make any predictions off this chart, but I would draw your attention to an interesting aspect. Notice how the blue line climbs steadily but falls very quickly. Yes, the bond market doesn’t like being ignored.

  • McDonald’s Earns $1.40 Per Share
    , January 23rd, 2014 at 11:30 am

    Yesterday, eBay and Stryker beat by one penny per share. Today, it’s McDonald’s ($MCD) turn.

    McDonald’s reported fourth-quarter sales growth that missed estimates, even though earnings per share beat forecasts by a penny a share.

    The fast food giant said it earned $1.40 billion, or $1.40 a share, as sales climbed 2% to $7.09 billion. Global comparable-store sales dropped 0.1%, adjusting for the opening of new stores and closing of others.

    U.S. comparable-store sales dropped 1.4%. The company said the average customer spent more, but there were fewer of them.

    The profit was virtually unchanged from late 2012, though earnings per share rose two cents as the company’s share count decreased due to stock buybacks. Analysts had expected profit of $1.39 a share.

    McDonald’s shares were up 0.5% to $95.35 in morning trading.

    “As we begin 2014, global comparable sales for the month of January are expected to be relatively flat,” McDonalds CEO Don Thompson said. “While near-term challenges remain, we are intent on strengthening our brand to further differentiate McDonald’s and become an even bigger part of our customers’ lives.”

  • Morning News: January 23, 2014
    , January 23rd, 2014 at 4:56 am

    Davos Bankers Struggle to Convince Elite That Markets Are Safer

    China Stocks Fall With Yuan After Surprise Manufacturing Decline

    Spain Says Jobless Rate Tops 26% at End of 2013

    In Twitter Onslaught, Carl Icahn Nags Apple to Spend More Money

    EBay Says Icahn Proposes PayPal Spinoff After Taking Stake

    IBM’s Earnings Blues Are a Big Opportunity

    Lenovo to Buy IBM Low-End Server Business for $2.3 Billion

    Toyota Beats GM, VW in 2013 as 3% Growth Planned in 2014

    LG Display Q4 Operating Profit More Than Halves, Beats Analyst Estimates

    Why Advanced Micro Devices, Inc. Shares Plummeted

    Netflix Soars on Possible Price Shift as Outlook Tops Estimates

    Target Hack A Tipping Point In Moving Away From Magnetic Stripes

    Coach Sales in North America Plummet as Market Share Erodes

    Jeff Miller: Ignore the Fed Factoid

    Joshua Brown: Active is the New Passive

    Be sure to follow me on Twitter.

  • Good Earnings for Stryker and eBay
    , January 22nd, 2014 at 4:53 pm

    After the closing bell, we got two more Buy List earnings reports.

    Stryker ($SYK) beat by one penny per share.

    U.S. orthopedic implant maker Stryker Corp on Wednesday said quarterly net profit rose 43 percent, driven by increased sales in its reconstructive and neurotechnology divisions as well as lower taxes.

    The company reported fourth-quarter net earnings of $386 million, or $1.01 per share, compared with $270 million, or 71 cents a share a year earlier. Net sales for the quarter rose 5.6 percent to $2.47 billion.

    Excluding items such as product recall and acquisition charges, Stryker earned $1.23 per share. Wall Street analysts, on average, expected $1.22 per share, according to Thomson Reuters I/B/E/S.

    Stryker said its effective tax rate in the latest quarter was 10.3 percent, compared with 24.6 percent in fourth quarter 2012.

    For full-year 2014, the company projected organic sales growth of between 4.5 percent and 6 percent.

    For all of 2013, Stryker earned $4.23 per share. The company sees earnings between $4.75 to $4.90 per share for 2014. Wall Street had been expecting $4.63 per share.

    ebay ($EBAY) also beat by one penny per share and it drew some interesting comments from Carl Icahn.

    EBay Inc. on Wednesday reported a fourth-quarter profit of $850 million, or 65 cents a share, on revenue of $4.5 billion, compared with earnings of $751 million, or 57 cents a share, on $3.99 billion in sales in the year-ago period.

    Excluding one-time items, eBay would have earned 81 cents a share. Analysts surveyed by FactSet had forecast eBay to earn 80 cents a share on $4.55 billion in sales.

    Additionally, eBay said it authorized an additional $5 billion stock repurchase program.

    EBay also said that it received a proposal from activist investor Carl Icahn seeking to spin off PayPal as a separate company, and that Icahn is nominating two of his employees for positions on eBay’s board of directors. EBay shares rose 8% in after-hours trading following the slate of announcements.

  • Morning News: January 22, 2014
    , January 22nd, 2014 at 7:08 am

    ‘Burnt out’ EU Likely to Curb Climate Goals

    Carney Reins In Market View on Pace of Increases

    Invasion of Spanish Builders Angers France Struggling to Compete

    BOJ’s Kuroda Shrugs Off Need Ror More Easing, Bullish on Inflation Target

    Offshore Companies ‘Shroud’ Riches of China’s Red Nobility

    With Janet Yellen on Deck, Federal Reserve’s Bernanke to Stick to Low-Rate Vow

    Gross Heir Apparent El-Erian Quits as Pimco Fights Outflows

    Delta Leads Airlines’ Gains as Earnings Beat Estimates

    Verizon Plans to Buy Intel Media Division to Expand Its Television Services

    AMD Makes Profit on Top of Console Sales in Q4, But PC Biz Struggles

    IBM Top Executives to Forgo Bonuses as Profits Fall

    Warren Buffett Offers $1 Billion for a Perfect March Madness Bracket

    In Age of Market Scrutiny, Who Wants In on the Gold Fix?

    Cullen Roche: A Friendly Reply on Hyperinflation

    Roger Nusbaum: Turning Asset Allocation Upside Down

    Be sure to follow me on Twitter.

  • CA Technologies Smashes Earnings
    , January 21st, 2014 at 4:25 pm

    Excellent earnings from CA Technologies ($CA). For the December quarter, which is their fiscal Q3, CA earned 84 cents per share. That’s 14 cents more than consensus.

    For 2014, CA sees earnings ranging between $3.05 and $3.12 per share, compared with Wall Street’s estimate of $3.02 per share. The company sees full-year revenues ranging between $4.52 and $4.57 billion versus the consensus of $4.50 billion.

    From the earnings report:

    “CA Technologies delivered another solid performance in the third quarter,” said Mike Gregoire, CA Technologies chief executive officer. “We outperformed on revenue and are pleased with our renewals business and disciplined approach to cost control. We also saw good traction with our recent acquisitions Layer 7 and Nolio… , which both had strong performances.

    “While I’m encouraged by our performance in Q3, we need to continue to improve our execution across development, marketing and sales,” Gregoire continued. “Based on our results so far this year, we expect our fiscal year 2015 revenue growth rate and non-GAAP operating margin to be similar to fiscal year 2014.

    “We are driving significant improvements in our products and go-to-market, including the release of organic innovation such as CA Cloud Storage for System z and the launch of a new ad campaign in select airports around the world as well as online.

    “With two months to go in the fiscal year, we are more focused than ever on delivering great products, increasing market awareness of CA and our capabilities, and accelerating the velocity of our efforts to sell more software to more customers,” Gregoire concluded.